Panel Finds Deep Flaws in Key Lockheed Unit : Aerospace: Problems in Space & Strategic Missiles Sector have resulted in a string of costly launch failures.
Lockheed Martin Corp., the world’s largest defense contractor, has systemic quality control and management problems with its Space & Strategic Missiles Sector that must be corrected before it qualifies as a reliable provider of military satellite launches, according to an independent panel’s report released Wednesday.
The panel found that the division, which accounts for the largest share of Lockheed sales, was stinting on quality controls in its top programs to cut costs. The commission was established in May after three multibillion-dollar failures of Titan IV launches, six consecutive failures of the Theater High Altitude Area Defense, or THAAD, system and one Athena launch failure.
“We found systemic problems . . . that need attention,” said panel chairman and former Martin Marietta Corp. President Thomas Young in a telephone news conference. “These were systemic problems in accountability, quality, loss of experienced personnel, subcontractors and supplier management and cost emphasis. We found too much emphasis on [reducing] costs” at the expense of a successful mission.
The panel’s report is the latest blow to Bethesda, Md.-based Lockheed Martin, which has disappointed investors with four profit warnings since November, blaming its problems on fewer orders for commercial satellites and delays in some of its key rocket and aircraft programs.
The failure of an August 1998 Titan mission cost Lockheed $29 million of a potential $37 million in bonus payments. Under a new contract, the company could be penalized as much as $135 million more over the next three years, including up to $37 million this year if Air Force contracting officials find it was mostly to blame for the failure of a Titan mission April 30.
Lockheed’s space and strategic missiles business suffered another setback last week when Thomas Corcoran, the division’s chief, left to become president and chief executive of metals manufacturer Allegheny Teledyne Inc.
The space unit was also rocked Friday when the National Reconnaissance Office, the nation’s largest intelligence agency, awarded a contract for the next generation of imaging satellites to a team of Boeing Co. and Raytheon Co.
Lockheed Martin’s Sunnyvale, Calif.-based spacecraft unit had been the sole contractor to the NRO for four decades. The string of problems at the firm so far has apparently not extended to Lockheed’s Skunk Works unit in Palmdale, where the firm builds classified aircraft and is helping develop the joint strike fighter.
Shares of Lockheed closed up 81 cents Wednesday at $35.81 on the New York Stock Exchange. The price has tumbled 37% over the last year.
The Space & Strategic Missiles Sector had $7.4 billion of Lockheed Martin’s $26 billion in sales in 1998, the largest of the company’s five operating units.
“The report is a good step, but my impression is that the issues don’t just pertain to launch vehicles,” said Byron Callan, a defense analyst for Merrill Lynch & Co. “Hopefully, the lessons can be applied to the entire operation.”
The Young panel reviewed five years of Lockheed Martin program performance and interviewed about 200 company employees and 24 government officials. The panel’s report focused on the Titan IV system, which launches most of the nation’s intelligence satellites and has 11 missions to go, Young said at a joint news conference with Peter Teets, Lockheed Martin’s chief operating officer.
A major message in the report, Teets said, was that the company emphasized cost control at the expense of quality control. “I know that it is important for us to be cost-effective and efficient and drive costs down to make our products more competitive,” Teets said. “Perhaps we have cut corners where we shouldn’t have.”
“What comes out loud and clear is that this is a ‘people’ problem and not a ‘technical’ problem,” said Loren Thompson, a defense and aerospace analyst for the Lexington Institute, a Washington think tank.
The report said the company has made considerable progress in correcting problems but needs to improve work force training to reduce costly errors and improve management accountability in the Titan IV-B program, Young said. “We’ve let some of our customers down in the last two years,” Teets said. “We intend to rectify that situation in a very strong, meaningful way.”
Lockheed Martin will have two more chances this week to demonstrate success. An Atlas II launch and an intercept test of the PAC-3 antimissile system are both scheduled for Friday. A successful PAC-3 test will allow the program to move into early production.
Still, “the whole notion of ‘mission success’ has been a Lockheed Martin mantra, but it has not resulted in superior share performances,” Callan said.
Separately, shares of Comsat Corp. fell 9% after Lockheed Martin disclosed a possible hitch in its effort to get antitrust clearance to acquire the satellite service provider. Comsat fell $3.06 to $30.69 in NYSE trading Wednesday.
In May, Lockheed said it had reached an understanding with the Justice Department that would form the basis for a formal antitrust agreement on its purchase of Comsat. The terms called for Lockheed to sell its 14% stake in Loral Space & Communications Ltd. over a two-year period.
Lockheed acquired its Loral stake in 1996 as part of a larger transaction in which it purchased Loral’s defense and systems integration business. Comsat World Systems provides communications services using the global satellite networks of the International Telecommunications Satellite Organization, or Intelsat.
